Chapter 2 - The Accounting Equation

Question 1

What is the Accounting Equation?

Answer 1

Assets = Liabilities + Owner’s Equity

Question 2

What is the Balance Sheet?

Answer 2

An accounting report that details the businesses assets, liabilities and owner’s equity at a particular point in time.

Question 3

Why is the balance sheet titled “as at”?

Answer 3

Because the business engages in a number of transactions every day, and every transaction effects the balance sheet, the balance sheet is only ever accurate on the day it is prepared

Question 4

How does the BS uphold Relevance?

Answer 4

The BS lists assets on the LHS and each liability and owner’s equity on the RHS. This listing upholds Relevance, as the nature and amount of each item is capable of making a difference to decision-making

Question 5

Current Asset Definition

Answer 5

A present economic resource controlled by the entity as a result of past events that is reasonably expected to be converted to cash, sold or consumed within the next 12 months

Question 6

Non-Current Asset Defintion

Answer 6

A present economic resource controlled by an entity as a result of past events that is not held for resale and is reasonably expected to be used for more than 12 months

Question 7

Current Liability definition

Answer 7

A present obligation of the entity to transfer economic resource as a result of past events that is reasonably expected to be settled within 12 months

Question 8

Non Current Liability definition

Answer 8

A present obligation of the entity to transfer economic resource as a result of past events that is not required to be settled within 12 months.

Question 9

What QC supports classifying the balance sheet?

Answer 9

Understandability, as the balance can be understood easily and is more helpful for decision-making.

Question 10

What are the two rules for double-entry Accounting?

Answer 10

1. Every Transaction will effect at least two items in the accounting equation
2. The Accounting Equation must always balance